Mar 102014
 

Turning Existing Money to Passive Income

Many people look at their savings as money they can spend in the future. But I like to think of my savings as a perpetual generator of income instead. The difference is once you spend money in the future it’s gone. But if you have a machine that brings you a steady stream of income then that cashflow is perpetual. 🙂 It’s better to have a goose that lays golden eggs than just a pile of golden eggs.

This means when I save $1,000 today, I don’t deem that money “spendable” anymore. Instead that $1,000 of savings have been changed into $40/year of passive income (or 4% of the saved amount) for the rest of my life. 😀

Many actuaries and financial experts like to use the 4% rule because it represents a sustainable draw down rate over a long period of time. On a similar note, when I occasionally sell my investments to pay for large purchases, I also think of that as stealing income away from my future self.

If one manages to save $1,000 a month and make an investment return of 4% above inflation every year, then after 32 years of working, he or she will have about $750,000 of investable assets, which that person can draw down from at 4% a year, or $30,000 of spending money forever.

14-03-savings, savings are future income

With $30,000 of income every year coming from our nest egg, plus maybe $20,000 from government assistance/private pensions, we can expect to live quite comfortably on a $50,000 annual income. Not everyone is able to save $1,000 a month, but statistics show that men who live on the west coast like myself plan to save on average about $15,000 this year. So for most people, $1000/month of savings, if not more, is to be expected. One way I like to save is to cook my own meals most of the time because eating out can be quite costly.

14-03-expensive-food, savings are future income

Personally my savings rate is about $1,500 to $2,000 a month thanks to my side hustles. So I plan to retire quite a bit earlier than 55. 😀 In fact, according to my latest net worth details which I publish every month, I already have over $750,000 of financial assets today. 😉

However that’s not the entire story. The reality is that I only have about $175,000 of investable, liquid assets. The remaining $575,000 is locked up in long term, capital appreciating resources such as my home and my farmland. Nevertheless building up $175,000 of stocks and bonds over a 5 year period still sounds pretty far-fetched given my average salary. Luckily there’s a wonderful tool called leverage that has made all this possible! Instead of buying stocks in a regular trading account, I have a margin account which allows me to invest with borrowed money and I was able to double the performance of the S&P 500 stock market index over the last few years!

Our age and risk tolerance will influence our asset allocation but generally speaking we should be able to sustain a 4% withdrawal rate by investing 60% of our money in equities, and 40% in fixed income. In terms of geographical allocation we can go with a 50/50 North American and international split to stay diversified. We then rebalance our portfolios to meet these ratios once a year. 🙂

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Random Useless Fact: What is a 4 letter word, yet is made up of 3. Rarely consists 6 letters, and never is written with 5.

Hint for the riddle above: Think about why it’s under the Random Useless Fact section 😉

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18 Comments on "Savings Today Are Incomes Tomorrow"

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My Own Advisor
Guest

We think the same….

I have a grin ear-to-ear when I’m able to save $1,000 in our RRSPs or TFSAs. That means another $40/year of passive dividend income in retirement. Our goal is to increase our dividend income by at least $40-$50 every month, without dividends being reinvested. Add on the positive effect that DRIPs can provide and hopefully we’re living off about $30,000 of income every year coming from our portfolio without ever touching the capital in 15 years.

Add in $20,000 from the government via CPP and OAS, pensions and other assets, and we should be able to live from $60,000 per year in 2030 dollars.

Mark

Arun
Guest

If you invest $1000 for dividend growth stocks, you will get much more than $40/year for long term, and you can simply ignore the inflation too.

Brian
Guest
Brian

Ignore inflation at your own risk! 2% Inflation means the dollar will lose 75% of its value over the course of an average lifetime!

PC
Guest
PC

Nice way of seeing savings as future income. Not a lot of people can save $1000 consistently through the years unless they bring home a higher income. Too often we have too many obligations to pay before we can save any money.

hungry hungry artist (@blerghhh)
Guest

Dude… You need to e-mail me. My options trading strategy is been proving itself VERY robust week after week after week. If I had your capital base, I would be livin’ large!

Pauline @ Savvy Scot
Guest

For me savings is time/freedom. $1,000 today is the possibility to live for a week or two, somewhere down the road, without working. If there is 4% on top, even better.
And yes, “what” has 4 letters!

JC @ Passive-Income-Pursuit
Guest

It’s really such a simple concept and it’s amazing how relatively small amounts will add up to big amounts given enough time. Can’t do $1,000 per month, try $500 and then see what you can do to get it up to $1,000. There’s lots of opportunities to either cut expenses or earn some side hustle income to boost your savings.

Phil
Guest
I will say 4% is very conservative. Our 10yr return all said and done, including the MAJOR stock crash at the end of 2007/2008, has been 4.9%. Given that this has been a rather non-typical 10 yr cycle (yeah right – it’s typical…), I’d say based on my experience and data 4% in quite conservative. As to saving $1000/ month, When my wife and I were starting out we were saving one of our salaries for the long term, so about $3000 after tax each month. This is why I can be an at home dad now and why I stopped “working” at 40. Now to one of your points, yes I understand margin/leverage and debt, but anyone using it needs to understand what can happen when it goes wrong… So always keep a handle on the borrowing. Now that I am not working, I tend to track how our net worth grows, and again if I average out that number over the last 10 yrs it has been 11%. Given that my wife plans to work another 10yrs at her job, a) because she likes it, and b) because she’ll acquire a nice pension from it,at that point anything… Read more »
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[…] I like to think of a windfall not as money per se, but more as a perpetual generator of income. ? Money used up now is gone forever. But a money producing machine will last a lifetime. ? As I explained in a previous article, we can easily turn today’s savings into future incomes. […]

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